The spread between two- and 10-year yields widened to about 100 basis points, the biggest gap since January 2005.

In afternoon trade, the Dow Jones, S&P 500 and Nasdaq stock indexes were all lower, but had cut their steepest losses. Earlier, the Standard & Poor's 500 index briefly slipped into negative territory on the year.

"The markets are worried about the economy slowing down too much," said Josh Stiles, senior bond strategist at IDEAglobal.com. "We're used to an environment where everything is 'just right' with growth steady and inflation low. But the market action tells you what the Fed is saying: that they're seeing risks on both fronts -- growth and inflation."

Stocks incurred additional losses and Treasuries made further headway at midmorning following news that U.S. consumer sentiment was at its lowest level in two years in November. The Reuters/University of Michigan Surveys of Consumers said its final November figure on consumer sentiment was 76.1, above the median forecast in a Reuters poll of 75.0 but below 80.9 in October.

At 2pm ET, when the market closed for the Thanksgiving Day holiday, the benchmark 10-year note yielded 4.01 percent. Earlier, it had dipped below 4 percent for the first time since September 2005.

"The market [traded] on emotions," said George Adell, fixed-income strategist at Commerce Capital Market in Jupiter, Fla. "No one knows when this credit and housing [correction] will bottom."

The U.S. bond market will be closed Thursday for the U.S. Thanksgiving holiday. It will also close early at 2pm ET Friday.